Gold won’t be a ‘pariah’ again: Top HSBC metals analyst

By Bill Mann

VANCOUVER(MarketWatch) — Gold as an investment isn’t going away — even if its price drops as many have predicted, over 200 bankers, brokers, and commodities dealers meeting here this week were told at a major Canadian conference on mining, precious metals and oil.

James Steel, New York-based Commodities Research Analyst at HBSC Securities Inc., told a packed ballroom at the gathering, sponsored by Canadian Business magazine and Canadian online news service Business Without Borders, that even if gold takes a short-term hit, it’s become an accepted long-term investment for most portfolios.

“We won’t return to the gold sell-off we saw in the 1990’s after the Soviet Union fell and world tensions eased, when central banks were aggressively selling off gold,” Steel predicted.

“Then came 9-11,” Steel noted, “and we’ve exchanged one set of global tensions for another.” There will always be tensions somewhere, he said, and that’s why gold is now becoming widely seen as a keeper.

Steel wasn’t here to lead a pep rally for gold bugs, but his careful, thoughtful presentation giving several relatively obscure reasons for the inclusion of gold ETF’s in investors’ portfolios impressed many attendees I spoke to afterwards.

The ‘go-to’ investment

“Gold is the go-to safe haven, whether the crisis is global or local, whether it affects the bond markets or not,” Steel explained. “It carries no credit risk, and is highly liquid. Canadian farmland may carry no credit risk, but in a downturn, it isn’t liquid.”

The aptly named metals analyst (Steel) added that “a number of portfolio managers are now keeping 5% of gold in their portfolios going forward.” He noted that “Much of the gold buying going on recently has been buy-and-hold.

“One pension-fund manager told me, ‘I hope this (gold) is the worst investment I make this year.'”

In many developing countries in the world, attendees were told here in Vancouver, gold isn’t an investment, it’s the de facto currency.

Adding to gold’s value, Steel noted, is that it’s mined in significant amounts in only four countries — China, the U.S., South Africa, and Australia.

Steel said that overall gold output has been declining, which also adds to its value, and labor costs to mine gold around the world are escalating, which further pushes up prices. He said 70 percent of all the gold ever mined has been taken out of the ground since 1900, and that the quality of ore has been declining.

Engineering the future?

Steel surprised many at the big commodities conference by revealing an interesting but little-known reason for rising gold prices: A critical shortage of trained mining engineers.

“In 1946,” the HSBC analyst said, “the number of mining-school grads shot way up. In the 80s, it leveled off. and in the 90s, it plunged as many of “the best and brightest” future grads opted for biotech and dotcom careers.

“There is a critical shortage of talent in gold mining,” Steel said. “The average age of a mining engineer now is 52.”

For all the above reasons, Steel predicted, “Gold won’t be a pariah again like it was in the 1990’s.”

Funny Line: The British-born Steel started his presentation by throwing some literary raw meat to the Canadian audience. He quoted Canadian media scholar Marshall McLuhan, commenting on Americans’ woeful lack of knowledge about their next-door neighbor.

“McLuhan,” said Steel, once said, ‘Americans are benevolently uninformed about Canada, and Canadians are malevolently well-informed about the U.S.”

That got a big laugh, but not as big a laugh as the quote Steel related from a former Canadian Prime Minister.

The outspoken then-P.M. Pierre Trudeau was asked if he supported Canadians emigrating to the United States.